Earnings reports are kind of like reports for American companies, and they can tell us a lot about what a business is doing and what it wants to do. The alphabet reported a drop in revenue on Tuesday: revenue growth slowed – the way down – from 41% last year to 6% this year. On the other hand, payroll processor ADP reported higher earnings on Wednesday that surprised investors.
So far this earnings season, most S&P 500 companies have reported beating earnings expectations.
“I think the reaction to the report is generally positive,” said Alex Zukin, director of Wolfe Research. “It’s a reaction that surprises people a little.”
The consensus is the part of the earnings report that companies tell you they expect to happen down the road. Microsoft, for example, has been told to reduce demand for some of its products, Zukin said. Some other red flags Zukin sees are companies that are now focused on cost cutting.
“How do we make sure that every dollar we spend is spent legally?” he said. “These two factors are generally negative for the future environmental demand.”
And there is a telling difference between companies that have poor outlook or poor earnings, and those that don’t.
“It depends on who you’re selling to,” said Michael Walker, an analyst at real estate management firm AllianceBernstein. “If you sell to customers or if you interact with customers and people, you are doing well so far and in fact the outlook is very good for next year.”
The job market is good, so it’s no surprise that Payroll processor ADP wins the revenue.
“On the flip side, if you sell to companies then you start to see a decline,” Walker said.
Google, Microsoft, and Texas Instruments all had disappointing forecasts, and all three companies sold to businesses. It is businesses that are beginning to feel the teeth of rising interest rates – rising prices make borrowing more difficult and they lower stock prices.
“It comes in waves,” said Joel Prakken, head of U.S. markets with S&P Global Market Intelligence. “We have seen, for example, that housing is the first sector to respond by contracting.”
Next, he said, business spending on consumer goods will fall.
“Somewhere in the mix you’re going to see a decline in consumer spending,” he said.
And all of that will start showing up in the income statement as time goes on.
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